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Tuesday, April 22, 2008

Why issue taxable bonds to build a courthouse?

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Yesterday word came down that the City of Portland is going to pay $9 million to move a ramp off the Hawthorne Bridge near where Multnomah County wants to put a new courthouse downtown (some day). Since both the bridge and the courthouse are county, not city, property, one might wonder what that's all about. But hey, it's all for the public good. Why quibble about which local government entity pays?

Nonetheless, there's something about the financing of this that doesn't quite hold together. According to a press account, the money for the ramp move is coming from the city's recently negotiated sale of urban renewal bonds for the "downtown waterfront" area, which at last report was supposed to close today:

The PDC voted in November to provide most of the estimated $10.7 million it will cost to move the ramp to free up the block for construction of a courthouse.... The PDC is funding its share of the project from the final bonds sale for its Downtown Waterfront Urban Renewal Area.
Now, wait a minute. The interest on those bonds -- 6.0278 percent a year -- is not tax-exempt for federal tax purposes. At first blush, that was not surprising, since bonds issued for certain "private activities" don't get the benefit of federal tax exemption, and a lot of urban renewal bonds in these parts sure do look as though they're being issued more for private benefit than for anything else.

But if the city knew all along that it was going to borrow $9 million to move the bridge ramp for the county courthouse -- clearly a public project -- couldn't it have issued fully tax-exempt bonds for that? If not, why not? And if so, why didn't it do that?

If the interest on the bonds had been federally tax-exempt, the interest rate would have been quite a bit lower. If it were 1.75 percent lower, that would be an interest savings of $157,500 for the city in the first year alone.

Are we paying $157,500 more a year in interest to Citigroup and Bank of America than we really need to be paying?

There's another oddity here, but it's relatively minor compared to the taxable bond question: The preliminary official statement for the bonds (page 26 of this large pdf file) shows that the city had already borrowed $8,820,000 for the ramp move under its shadowy urban renewal line of credit. That portion of the line of credit is going to be paid off out of the new, permanent bonds. Well, what the heck has the city been doing with that $8,820,000 up to now? Yesterday's announcement makes it sound as though no checks have been written until this point. Where has that $8,820,000 been sitting since it was borrowed under the line of credit? Why was it drawn from the bank at all?

Comments (14)

The city would have a very difficult time finding an underwriter for a $9m issue.
Also the interest is not paid to C or BAC, its rare that they would hold the issue in inventory.

Folks are irate about all the money oil companies are pulling, but city government is just as awash in cash. For instance, there's the above tossing of a few million bucks here and there to various friends of the city. There's a whole army of city staff, making good salary, dreaming up new street cars for the next 50 years. I'm also hearing of plans to make some of the public golf courses more upscale, putting up new club houses in place of the manufactured club houses. All of this while, joe and mary "six pack" struggle to meet the mortgage payment.

Cityhall politicians talk scathingly of big oil. Maybe its out of jealousy, as they themselves want to be royally rich. Reminds me of the saying, "Don't steal. The government doesn't like the competition."

"Don't steal. The government doesn't like the competition."

Amen. Think, for example, of the Foreign Corrupt Practices Act. We can't have those corrupt payments going on overseas; they're needed here at home.

The city would have a very difficult time finding an underwriter for a $9m issue.

It sold around $11 million in a single issue for its archives project just last year. Besides, there's probably another few million of truly public projects in the $50 million they raised.

How can the city borrow twice for the same ramp move project?

$11m in a single issue? How, comp bid? Neg sale? or private placement?

That's a lot of dough to move the off ramp. Can't the county find a different site? Couldn't the local schools use an extra $9 million?

$11m in a single issue? How, comp bid? Neg sale? or private placement?

It was by public auction. And I was wrong, it was closer to $12 million. Still...

its rare that they would hold the issue in inventory.

B of A has an urban renewal line of credit to Portland in nine-figure territory, and I thought it was holding all of that debt in its own name. I could be wrong about that.

I think GL's point is the underwriter doesn't hold MUNI BONDS in their inventory. And they are still municipal bonds, even if they are taxable.

Loans to corporations are also subject to sale to third parties (typically mutual/hedge funds); I don't know if municipal loans are typically held on the bank's books or sold (I assume they are more likely to be held than corporates, because the default risk/yields are so low).

I just thought that $11m would be to small of an amount for an I banker to sneeze at. Revolvers can be held on the books or repackaged and traded at the short term window.

I just thought that $11m would be too small of an amount for an I banker to sneeze at.

Maybe they should have waited and packaged it with some other public-purpose debt. Lord knows that county courthouse won't be going up any time soon.

How can the city borrow twice for the same ramp move project?

They borrow once on an interim basis (with no notice), then borrow again to pay off the "interim" debt (at which point the money is usually already spent, but apparently not in this case). I've written more about this here.

Um, besides this financial morass, has anyone asked the question of why does the courthouse have to be built on this particular spot? Isn't there someplace else to build it that doesn't require removing a bridge ramp?

Also, exactly what is required in moving this ramp? In other words, why does it cost $9 million?

If I remember correctly, I think the land is already publicly-owned. Therefore someone decided that it would be cheaper to move the ramp than have to buy up an alternative city block that still be acceptable (close to the other government buildings, etc.)

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